Building a Card Portfolio for SME

Igor ganjer, Head of Multi Channel Management Department

zganjer@erstebank.com
Erste & Steiermarkische Bank d.d. Croatia
Budapest, 21 April 2005
An Excuse

I would just want to point out that the content of the presentation
is more about possibilities and different way to look to business
cards than the actual work
We started as most of the banks with business cards because
we wanted to issue them because everybody else does it
After four years of experiance we find out that it is very easy to
be on the market but it is very tough to make a difference and to
be different
But we learn our lessons about going forward and I hope that I
will prove it with this presentation

2
Agenda

Erste & Steiermaerkische Bank

SME Market in Croatia
Building a Card Portfolio for SMEs
What are the needs of SMEs
How the bank can help SMEs
Plan and positioning
First results
Going forward
Q&A

3
Agenda

Erste & Steiermaerkische Bank

SME Market in Croatia
Building a Card Portfolio for SMEs
What are the needs of SMEs
How the bank can help SMEs
Plan and positioning
First results
Going forward
Q&A

4
Erste Bank Group Key Facts

Market Cap (15/03/2005) EUR 10.2 billion

Free Float: 61.50 %
Average share price for 2004: EUR 31.93
Share-price high 07/03/2005: EUR 44.30
Share-price low 25/01/1999: EUR 9.19
YTD share price increase 15/03/2005: 48.7 %
1 Year total return at 15/03/2005: 50.2 %
Average daily volume for 2004 to 31/12/2004: 338,079
Shares Outstanding (as of 15/03/2005): 241.44 million

5
Largest players in the CE region
by total assets (in bn EUR):
2004 2003
1. Erste Bank 33,3 30,2
2. KBC 31,1 29,0
3. Unicredito 30,6 24,6
4. BA-CA 30,0 22,7
5. Raiffeisen 27,6 21,6
6. Socit Gnrale 23,6 19,0
7. OTP 16,9 13,2
8. Intesa Bci 16,3 14,3
Source: websites of the respective banks

6
Erste Banks Strategic Objectives

1. To exploit its core business potential in Austria and focus on its key
competencies in retail and SME banking.
2. To build on its role as the leading bank of the Austrian savings banks
sector and to seek increasingly closer co-operation and co-ordination
within the sector, creating further opportunities for cost reduction and
revenue growth.
3. To grow its business in an extended home market in Central Europe
with a potential customer base of some 40 million people and to
maintain its position as the leading retail financial institution in that
market.
4. To transfer its multi-channel distribution model throughout Central
Europe.

7
Erste Bank Group

8
Erste & Steiermarkische Bank Croatia

Osijek

600.000 clients
120 branches
GDP/Capita 10.400 EUR

Dubrovnik

9
Erste & Steiermrkische Bank Croatia
Key Facts

31.12.2004. 31.12.2003.
RoE 17,6% 14,7%
ROA 1,3% 1,3%
C/I ratio 53,4% 62,3%
Assets (in thousand kunas) 25.776.932 19.517.204

10
 Erste & Steiermrkische Bank d.d.
Market Share

Consolidated Balance Sheet of Croatian 31.12.2004. 31.12.2003. 31.12.2002.

Banks (ESB+RB)

Market share in assets 11,30% 9,60% 9,00%

Market share in loans 11,03% 9,09% 9,08%

Market share in deposits 10,10% 9,10% 8,40%

11
Source: Consolidated balance sheets of Croatian banks
 Erste & Steiermrkische Bank d.d.
Deposits market growth comparison

26,5 2004.
30 21 18,3 rast u %
20 8,6 6,3 9,6 ESB
10
0 Market
Total Deposits Corporate Retail Deposits
Deposits

12 Consolidated balance sheets of Croatian banks

Source:
Erste & Steiermrkische Bank d.d.
Corporate Loan Distribution

45 Market 14
Market
Erste Bank 12 Erste Bank
40 42,1% 11,98%
10

35 8
6
30 5,13%
4
25 2
0
20 Growth 2002/2003 (corporate loans)

15
10
5 7,9%

0
Growth 2003/2004 (corporate
13 loans)
Source: Consolidated balance sheets of Croatian banks
Agenda

Erste & Steiermaerkische Bank

SME Market in Croatia
Building a Card Portfolio for SMEs
What are the needs of SMEs
How the bank can help SMEs
Plan and positioning
First results
Going forward
Q&A

14
Size of Corporate Market in Croatia (2003)

Total income Pre-tax Total %

Number % in HRK % Profits in % number of
of billions HRK billions employees

Small 65.160 94,9 103,020 23,12 4,931 21,78 255,736 32,09

Micro 57.147 83,2 45,049 10,11 2,431 10,74 165,711 20,80

Middle 2.628 3,8 82,136 18,44 3,689 16,30 159.484 20,01

Big 895 1,3 260,348 58,44 14,015 61,91 381.751 47,90

Total 68.683 100 445,504 100 22,636 100 796,971 100

15
The SME segment

Over 95% of all businesses in the world are categorised as SMEs, the
number in Croatia is almost 99%
SMEs are the main drivers of economic growth and employ the majority
of the workforce
In some markets, more SMEs transact in the grey economy than in the
formal economy
Lack access to credit is a major constraints to SMEs development, and
businesses rely on suppliers, family and friends
Micro businesses use personal accounts to do business
SMEs are favourable towards business cards and appreciate its benefits
including: direct access to business account, segregation of expenditure,
easy access to frequent small lines of credit/overdraft
The SME segment is ready for business cards, but few are offered a
suitable product
16
Agenda

Erste & Steiermaerkische Bank

SME Market in Croatia
Building a Card Portfolio for SMEs
What are the needs of SMEs
How the bank can help SMEs
Plan and positioning
First results
Going forward
Q&A

17
Segmentation & migration

Business
Gold
Business

Embossed Cards

Business Unembossed

Business Unembossed Prepaid

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Building the Card Portfolio for SMEs

It is not only about cards

It is about clients and supporting them
It is about packaging the accounts with products and
services (not only with card products)
Card is the center of all services it grants profitability
of relationship for the Bank

19
And remember: even the Microsoft was SME once
 Example Barclays

Banks have started to focus on client relationships while

expanding the range of products and services offered to
businesses
Barclays has moved beyond offering a few specialised services to
businesses
Barclays now offers a businesses a wide range of financial
products and allows businesses to access bank information
through multiple channels. They offer:
Guides to help set up and manage businesses
Free fact sheets on different business markets
Barclay Business Insurance
Access to Barclays seminars and events
To enhance the clients relationship, Barclays offers a personal
relationship manager and a specialised business team to
service business clients

Barclays is not the only one Allied Irish Bank is

20
doing even more
Agenda

Erste & Steiermaerkische Bank

SME Market in Croatia
Building a Card Portfolio for SMEs
What are the needs of SMEs
How the bank can help SMEs
Plan and positioning
First results
Going forward
Q&A

21
Day to Day Business for SMEs

Payments Category
Checking the cash flow Travel & Entertainment
Gaining new customers and managing Printing/copying services
existing customers Utility bills
Selling Postal and shipping
Organising work (buying services and Office supplies
products neccessary to conduct business) Meals
Gifts
Telephone charges
Making transactions and Temporary Help
controlling the business Accounting Services
Office Maintenance
Insurance
Clothing/Uniforms
Inventory

22
Conducting payments in US

Majority of small businesses still rely heavily on checks, credit cards and
cash, leaving significant opportunities for debit card penetration
Payment Methods Used for Business Expenses
% of Respondents Using Method

Checks 100

Credit Cards 78

Cash 64

Electronic Funds
42
Transfer

Debit Cards 12

0 20 40 60 80 100
Source: MasterCard BusinessCard Debit Card Study
23
Important Card Features for SME

Security
Security against fraud and theft
Liability protection against employee misuse
Daily cash withdrawal limits
Daily purchase limits
Service
Toll free number
Emergency card replacement
Access and acceptance
Line of credit
Emergency financial assistance

24
 Ranking of Business Card Features

What SMEs want from Business Cards and from the issuer:
Enhanced statement reporting Becoming a card
Transaction data reporting merchant
Credit management tool kit Line of credit capability
Travel and purchase Medical insurance
discounts package
Unauthorized purchase Purchase insurance
insurance package
Points towards merchandise Emergency travel
rewards insurance package

25
Agenda

Erste & Steiermaerkische Bank

SME Market in Croatia
Building a Card Portfolio for SMEs
What are the needs of SMEs
How the bank can help SMEs
Plan and positioning
First results
Going forward
Q&A

26
 Addressing the Business Segment are we
prepared for SMEs

Many Issuers have a separate organization for SMEs

Organisationally, the SME banking area often resides in
the retail banking division

Does your bank have a What division is

discrete group for small-business banking
small-business banking? part of?
No Other
20% 20%

Retail
Yes 70%
80% Wholesale
10%

Source: Forrester Research, Inc Percent of 40 banks interviewed

27
 Develop a Card Business Program

Observations Identify Needs Implications

Use cash and checks Use for general Focus on control, flexibility,
purchases, supplies costs savings and security
for most expenses and T&E
Use consumer cards Increase emphasis on
Need access to wide general purchases and
for T&E and network of merchants
emergency supplies
Ability to revolve
Want discounts, payments Expand product options
rebates, etc. Access to line of credit debit and line of credit
Want to control Spending limits Develop discounts, etc.
expenses Promotions and Add Corporate Liability
Concern about discounts Waiver Insurance
providing cards to Insurance and assistance Add Extended Warranty
employees services Offer discounts through
Have different needs Want to be treated as a strategic partnerships
than large unique business not a
large corporation or a Focus on meeting the
corporations consumer needs of businesses

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Benefits of Business Cards
Convenience
Easy access to working capital
Worldwide recognition/acceptance
Worldwide ATM cash access
Ability to separate personal and
business expenses
Entry point for Internet commerce
payments
Secure and safe
Added value services
Access to discounts
29
Administration/time saving
Assisting forecasting and budgeting
Cash flow management tool
Cost reduction on insurance
Limits risk with liability waiver
insurance
Cost control with less cash needed
to run the business
Agenda

Erste & Steiermaerkische Bank

SME Market in Croatia
Building a Card Portfolio for SMEs
What are the needs of SMEs
How the bank can help SMEs
Plan and positioning
First results
Going forward
Q&A

30
 Market Segmentation

SMEs Corporate Clients

Start-up businesses High risk employees
Businesses new to Delivery drivers
banking/ payment cards
Distributors /
Lack of credit history wholesalers
Application rejects Opportunity to
reach large number
of retailers
Hotels,
restaurants,
Target customer groups bars

31
Strategy Development Product

Debit Card Credit Card Line of Credit

Frequency of
Routinely for: Routinely for: As needed for:
Use
Short-Term
Safety
Uses Office Supplies, Mail Order and T&E Working
Net
Capital
Average
Purchase <$100 $100150 $5,000$10,000
Size

Pay Off Immediately < 30 days/revolving 30365 days/revolving

Access Card Card Internet, Phone, Card

32
Product Positioning

Core Benefits
Debit, charge or revolving credit card
Cash access
Merchant acceptance
Convenience
Expense tracking
Emergency card and cash
Legal and medical referral
Travel incovinence
Value Add Benefits
Setting up limits according to client needs
Additional Benefits (usage at business deposit)
Internet Services (T&E and E-procurement)

33 Strategy Development
Web page as supporting tool

34
Example of Service for Business Card Clients

35
Integrated Business Depository

Operational objectives
Opening doors with the card
Simplier handling in the
branches
Getting the receipt
Result
1% of all corporate tx were cash
deposit transactions at business
deposit (introduced in 2004)

36 27 November, 2017
Target Groups

How to find potential customers for starting business programme:

Watch your database for:
- Companies who are paying trip allowances to their employees often (for
international and domestic trips)
- Companies which are paying their bills for business cards of your competitors
through your branches or your Internet banking
- Companies heavily relaying on cash
- Companies with lot of small value international payment orders
- Companies which are using your Internet Banking service
- Companies which are depositing money in your branches

If you want to be profitable ASAP start with Business Charge Cards and give
them to you best business clients.

37
Plan of action

1. Introduce Business card for internal needs (2000)

2. Introduce Business Charge cards for external use (mostly for
T&E segment) (2001)
3. Introduce Business Gold charge cards for managers as
differentiation tool from the competitors (2001)
4. Introduce Value Added Services (2003)
5. Introduce Debit Card for Craftsman (2003)
6. Introduce Business Debit Card for all corporates and SMEs
(planned for 2005)
7. Introduce Business Revolving Card ???

38
Agenda

Erste & Steiermaerkische Bank

SME Market in Croatia
Building a Card Portfolio for SMEs
What are the needs of SMEs
How the bank can help SMEs
Plan and positioning
First results
Going forward
Q&A

39
ESB Business Cards

40
Transactions per Channel in % in March 2005
companies (transaction number ratio) craftsmen (transaction number ratio)
2,9% 4,2%
16,0%
13,4%
22,4% 0,2%
31,0% CASH DESK - CASH DESK -
PAY OUT 2,0% PAY OUT
CASH DESK - CASH DESK -
PAY IN PAY IN
CASH DESK - CASH DESK -
TRANSFER TRANSFER
ATM ATM

POS POS
2,5%
NB NB
0,2%

41,1% 64,1%
TOTAL (transaction number ratio)
3,2%

27,3% 20,2%
CASH DESK - 4% of cash-in is made through
PAY OUT business deposit units
CASH DESK -
PAY IN (1% of total tx)
CASH DESK -
1,9% TRANSFER
ATM

POS
0,6%
NB

41
46,7%
Business Card Transactions vs Other Channel
Transactions
- Business card transactions are:
- cheaper for the Bank and the client
- quicker, because most of them are conducted on-line
- Examples include:
- Purchasing goods or services abroad
- Purchasing goods or services in country
- Business Cards are excellent tool for transactions between 50
and 3.000 EUR
In our case domestic payment order on Netbanking is priced at 0,50 kn, the
same transaction at branch is priced at 3,00 kn, and the same transaction with
card is fee free for the customer (the bank even get the interchange fee)

42
Typical Business Card Usage

Travel and Entertainment (T&E) hotels and

restaurants
Fuel
E-commerce/e-procurement
Office supplies
Stationery
Office equipment/furniture
Computer software
Literature
Advertising

43
ESB Card Programme Profitability

Standard/Classic Gold Business

Average Annual Volume by Card (EUR) 4.000
1.850
1.200

Average Transaction (EUR)

154
65
44

Credit losses as percentage of volume

1.7%
0.3%
0.01%

44
Transaction Frequency

Business Cards beats Standard/Classic cards 2,6 times

in usage
Business Cards beats Gold cards 5 times in usage

Every succesful interaction build up customer loyalty

45
Business Product Incentives

Difference in revenue from international interchange:

From 1.2% to 1.8% 50%

% of interchange income vs. total income: 62%

Business has 19% more profit than Gold

46
Agenda

Erste & Steiermaerkische Bank

SME Market in Croatia
Building a Card Portfolio for SMEs
What are the needs of SMEs
How the bank can help SMEs
Plan and positioning
First results
Going forward
Q&A

47
Going forward are these ways any good

Inteligent Business Deposit (BNA) ???

Authentication for on-line services ???
Business Debit Cards ???
Business Revolving Card ???

We do not know, but we are ready to explore

48
 Moving Forward with Inteligent Business
Deposit ???

Small enterprise clients

Private entrepreneurs

49
Authentication for On-line Services ???

50
Business Debit Cards ???

Customer Benefits Bank Benefits

Flexibility of using debit card instead of Generation of income

checks and cash Transaction revenue
No check acceptance hassles Annual fees
No need to carry around a lot of Sale of additional services
cash
Incremental deposits
Telephone and Internet purchases
Gain new customers
Worldwide acceptance
Encourage customer loyalty
Financial control with expense tracking
via information on statements
Added value of feature enhancements
Ability to give debit card to one or more
employees

51
Business Credit Cards ???

The provision of credit and financing to businesses is an

engine of growth for the economy & can be a major revenue
source for banks
Banks provide various credit and financing instruments
Many are time consuming, complex and expensive to
administer
Business Revolving Credit Cards can provide a simple, low
cost and low risk way of providing limited credit to suitable
companies
Banks remain in control of the facility
If you are afraid of risk, unembossed card ensures on-line
authorisation of every transaction
52
Final Model ???

Business Card
Debit or Credit
Value Added Functions (insurance, inconvinence,...)
Access to Web T&E and E-procurement Services
Authentication for on-line service
Cash in and cash out on ATMs
Line of credit

53
Agenda

Erste & Steiermaerkische Bank

SME Market in Croatia
Building a Card Portfolio for SMEs
What are the needs of SMEs
How the bank can help SMEs
Plan and positioning
First results
Going forward
Q&A

54